Inflation in the United Kingdom fell to 3.6 per cent last month – its lowest level for over a year.

The Office for National Statistics said the consumer price index (CPI) had fallen 4.2 per cent in December, its lowest level since November 2010, as the impact of the VAT increase dropped out of the annual comparison.

VAT was increased from 17.5 per cent to 20 per cent last year as part of the coalition’s deficit-reduction plan.

In spite of this decline in inflation, Sir Mervyn King, governor of the Bank of England, was forced to write another letter to the chancellor explaining why inflation was more than one percentage point above the government’s 2 per cent target.

"The unwelcome contribution of sluggish growth and high inflation over the past two years is a reflection of the need for the economy to rebalance following the financial crisis and associated deep recession, together with rises in the costs of energy and imports," he wrote.

"Although inflation is now falling broadly as expected, the process of rebalancing still has a long way to go. Growth remains weak and unemployment is high."